Dani Rodrik's View on Global Economy - Case Study Example

ID Number: Global Economy Question Dani Rodrik is considered to be a well-known critic in context of international order. His views are centered towards holding on currency value when financial capital position is not strong. Dani Rodrik stated that those countries are rich in terms of capitalism who has erected a wide range of formal institutions. There exist third party enforcements where rules are set by governmental apparatus. He outlined that an economic development is dependent on its maximum share of resources which belongs to public sector. Dani Rodrik clearly states that economic position is enhanced through entering into international markets and taking pre-emptive measures in context of securities and risks. Question 2 Dani Rodrik had proposed a new dimension for global economic conditions. There are a lot of factors which contributes towards financial capital and differentiates rich countries from that of poor ones. Economic development and growth is only facilitated through capabilities being accumulated over a longer period of time. This truly encompasses technologies, public institutions and skills. It is not possible for globalization to leverage all such capabilities. They can only be leveraged by nations. East Asian nations have been able to enhance domestic productive capacities before entering into international markets. Reinvigorating requires maintaining a balance between markets and states without losing essence. Financial globalization Question 3 Dani Rodrik throughout his works has highlighted various aspects affecting globalization process. There lies a major threat with globalization in terms of providing social insurance by national governments. Globalization often results into conflicts between and within nations over social institutions and domestic norms. Domestic democracy plays a vital role in sustaining global capital. However it is often a challenge for such democracy to protect one’s nation from global threats. Culture and technology can only be strengthened through domestic democracy and these factors contribute towards achievement of global capital (Steger 52-55). On the other hand, skilled and unskilled workers during globalization tend to become substitutive and elastic. Question 4 I certainly feel that globalization has supported many nations to strengthen their position across the globe. There are threats associated with globalization and this has made many countries impose strict regulations or norms while trading with international markets. For instance, some European countries have laws stating that international players need to collaborate with domestic players for performing their operations in those regions. There exist two distinct categories – one which has skills and technology to operate in global markets and other which treats this aspect as a major cause for social insecurity. In overall context, I believe that there is correlation between social stability and global markets (Steger 39-42). Question 5 Globalization has facilitated cross-border or open-border relations. The degree of cross-border activities over period of time has fallen and risen from time to time. Globalization has gained significance in different contemporary life situations. Expansion of business enterprises are an area enhanced through globalization. Individual states have deliberately faced by the concept of globalization. This has been observed in the form of utilizing various kinds of resources, different cultures and histories, different choices and different policy options. The globalization of capital has progressed across various regions such as North America, Australia, Western Europe, Latin America, East Asia, etc. Contemporary globalization has almost penetrated across all regions in the world. Effect of trans-border capital concentrations has been witnessed in different countries in South. There have been new themes evolving which denotes relationship between state and global capital (Rodrik 93-99). States are able to survive and see ever-changing face of globalization. Trans-border capitalism along with globalization has been able to deprive states of sovereignty. The approach of trans-border capital has provided modern day states with some supra-territorial constituents together with traditional domestic citizenry. Trans-border process has even undoubtedly resulted into certain disincentives to state warfare. Supra-territorial capitalism has influenced states to eliminate various social security provisions. Globalizing capital has even promoted a growth within multilateralism amongst different states. There are foregoing trends which is creating difficulties for democracy realization in many states. On the contrary, some facts even highlights that state is obsolete and powerless in terms of facing globalizing capital. Trans-border production, finance, money and marketing have deliberately constrained weaker and smaller states, mainly those located in South. These states have seen their subordination position in context of world affairs as exacerbated and reconfirmed. Across the globe as many states are there have faced accelerated globalization, and are entrenched or larger in formation of social relations. Those states which have been committed to shrunken public sector in current scenario have increased their budget, payroll, regulation scope, etc. Contemporary states reflect a general retreat related to general production means. The reduction in terms of privatization has been more in the framework of state expansion. In certain situations trans-border capital or globalization possesses a contradictory relationship with states. States have definitely played an indispensable role in relation to capital globalization. States have provided the architecture in context of global finance through passing legislation, exchanging controls, permitting external banks to establish operations, enabling non-resident ownership of equities or bonds, etc (Rodrik 123-128). Question 6 The formation of economic policies is dependent on striking a balance between domestic and global determinants of an economy. Balance of trade is an important factor for every country so as to ensure that there is a balance maintained between imports and exports. It is essential to enhance domestic production along with foreign supply of goods. In overall context there are three determinants of trade balance such as national income, foreign and domestic price levels, and foreign exchange rates. Foreign exchange rate changes across the globe and it plays a significant role in formation of economic policies. For instance, if dollar appreciates imports increase and exports decrease. It can be stated that foreign exchange rate increases when dollar value tends to become strong (Steger 40-44). This in turn enhances foreign trade deficit. On the contrary, foreign trade deficit witnesses a fall when dollar value depreciates. Any country formulates policy in such manner that there is proper balance between global and domestic determinants. Too much dependency on global factors makes an economy volatile by nature. Hence it is important to encourage domestic determinants by enabling wider scope for growth. Increase in income level across wide range of foreign countries increases export rate of dependent country. On the other hand, increase in national income also increases consumer demand for different services or products manufactured in other countries. Increase in national income increases imports and thus increases foreign trade deficit. Global determinants are always strengthened when home production is costlier in comparison to foreign goods. This form of imports increases demand level of consumer market and even there is rise in GDP growth rate witnessed. Domestic determinants of economic policy are well balanced when imports and exports are maintained in equal amounts. This is clearly reflected in some economic policies where domestic production is given more importance by governmental authorities rather than foreign imports. Question 7 Capital control is another policy that redirects or limits capital account transactions. This form of controls is quantity or price controls, taxes, international trade prohibitions, etc. Mobile global capital is all about allocating funds in appropriate areas. In initial stage capital is properly maintained in domestic economy. This is facilitated through interest income and wealth taxation. Capital control even enables higher inflation rate that generates high revenue margins. These kinds of controls decrease interest rates and borrowing costs of government. Capital outflows or mobility of global capital have been widely used in developing economies. This technique is utilized for generating revenue and allocating credit domestically. The controls of capital outflow enable a region to exhibit higher inflation and also sustain domestic interest rates. State responses are taken in terms of capital outflow control. It helps to reduce foreign demand without any form of revaluation or expansionary monetary policy. This enables lower inflation rate that would not have been possible in real time scenario. The state measures are implemented in such manner that it restrict inflows and prevents monetary expansion. Restricting inflows even strengthens macroeconomic stability through decreasing capital pool which can affect a country during global crisis. Capital controls imposed by state authority changes or restrict capital flows which can distort incentives within domestic financial system. Mobility in capital plays a major role since funds are made available at a greater extent. However state responses to such mobility also need to be strong so as to ensure that funds are available during time of crisis. State measures are at times inclined towards domestic economy where more funds are allocated to make domestic conditions strong. Economic insecurity is rapidly growing in present scenario due to international integration of world based economies in the present scenario (Bhagwati 12-23). This has led to adoption of capital controls by state. Foreign ownership in case of some domestic assets might result into any kind of resentment. The benefits in terms of investing into domestic economy are always accounted as superior. Economic conditions can be relatively better when capital outflow is totally restricted. Domestic financial firms are initiated by state to control mobility of global capital in order to achieve economies of scale required for competing in global market place. Question 8 There are various capital control techniques utilized by a state so as to contain and manage global capital. These capital controls are distinguishable on asset transaction type, whether it is affecting or tax is being imposed or prohibiting it or limiting it. Bank deposits and currency can be considered as one type of asset. Exchange controls can be utilized for controlling current account. This form of control can be witnessed in influencing importers to purchase foreign exchange from state. Exchange controls are utilized in prohibiting luxury goods’ legal importation. Foreign exchange controls are implemented in case of politically desirable products. Exchange controls can be regarded as a limited capital control measure. They are not responsible for imposing a ban on long term flows of capital. This often reflects political sensitivity to domestic assets foreign ownership. Controls that are exercised on capital outflows and inflows enable certain slack for discretion of monetary policy within standard exchange rates, and this eventually takes place in opposite directions. There are controls on capital flows which facilitate higher tax rates. This measure has been used to decrease money supply expansion and its accompanying inflation rates. The capital outflow controls enable decreased interest rates and increased money growth (Neely 11-18). Price controls usually take the structure of special taxes on international investment returns. “Tobin tax” can be stated as one such mechanism that eradicates short-term capital flows. Tobin tax happens to charge every participant with a small foreign exchange transaction percentage. This kind of mechanism diminishes volatility of foreign exchange market and is involved in incentive curtailment. The tax rate tends to reduce the level of liquidity of foreign exchange markets. It can even be evaded through wide array of derivative instruments. Price based capital control technique can be stated as a mandatory reserve requirement. This is usually implemented to reduce the inflow rate of capital. This arrangement obligates foreign parties who have inclination towards depositing into domestic bank account. There exists procedure by which certain inflow percentage can stay with the bank for limited time interval. Quantity controls exercised on capital flows mainly encompasses special authorization for existing or new foreign resident borrowers or rules mandating ceilings. Domestic regulations implemented on institutional investors’ portfolio choices can also be considered as an example of capital control measure. This kind of mechanism has been observed in many countries in the past such as South Korea and Italy. Steger pointed in this regards as Question 9 Free capital movements possesses wide array of benefits which are essential for every region. Economists have stated that trading in assets or capital flows enables substantial economic benefits. This in turn facilitates different regions to capitalize on their wide set of differences. Free movements of capital permits regions to trade globally. For instance Japanese residents are observed to be aging more in comparison to that of United States. It is common to observe Japanese residents purchase more US assets than those goods addressing local consumer market demand. This also enables Japanese residents to save money for their retirement age while allowing United States residents to utilize lower interest rates for borrowing. Capital flows major advantage is that it allows countries to overcome any form decline in national consumption due to natural disaster or economic downturn. This is achieved through borrowing from other parts of the world or selling any form of assets. Another benefit of capital movement is that it permits whole country to borrow so as to enhance their capability for better production of services and goods in the nearby future (Ostry and Ghosh 410-422). Financial investment is needed by every country in order to strengthen their market position across the globe. Trading in assets can benefit countries of different saving rates, investment opportunities, age structures or risk profiles. There are other advantages of capital movements like technology transfer combined with foreign investment, or increased competition in local markets due to more foreign players investing in domestic segment. The capital flow’s benefits cannot be separated from the price aspect. Capital flows also has some major disadvantages since they can complicate economic policies as well as appears to be a source of instability. Capital outflow tends to increase foreign asset demand and decreases rate of inflation. Maintaining an appropriate balance between exports and imports helps to maintain financial stability of a specific region. Capital control techniques are strictly imposed by government in order to safeguard a county from such drastic impacts. Macroeconomic instability is another loophole associated with mobility of capital. The pool of capital generated through such movements leaves a country in a crisis situation. Domestic inflation rate is decreased by free capital movements and this result into depreciation of currency (Neely 26-35). Through these free movements of capital there are less of investors in domestic economy. As a result economic stability is disrupted to a great extent. In order to compete in global market place it is essential to provide domestic firms with equal scope for growth. This is highly facilitated through adoption of capital control techniques. Question 10 I have gone through wide array of articles stating different dimensions of global economy. Global economy is also stated as world economy where there is international exchange of products and services. I view global economy to be a global society in which different countries interact with another so as to gain economies of scale. World economy is usually evaluated in monetary terms where some form of international exchange might be beneficial for both countries whereas others might be advantageous for only a single country. Globalization has enabled many countries to achieve a stronger position in global market place. While I was reading articles related to global economy I found many developing economies trading with developed economies. These kind of global trading activities are usually exhibited so as to gain economies of scale. However global economy also tends to make one country dependent on another (Bhagwati 27-35). This is a major drawback of this approach since financial crisis in one economy has a long-term impact on another economy. I feel that free capital movements also play a significant role in global economy. These funds increase borrowing capacity of a region which is required for enhancing capability of future production of products or services. I have even studied some capital control techniques that are essential to restrict capital outflow and inflow in market place. Works Cited Bhagwati, Jagdish. In defense of globalization. UK: Oxford University Press. 2004. Print. Neely, Christopher. An introduction to capital controls. Federal Reserve Bank of St. Louis Review, pp. 13-30. 1999. Print. Ostry, Jonathan and Atish, Ghosh. Tools for managing financial-stability risks from capital inflows. Journal of International Economics, 88(2), pp. 407-421. 2012. Print. Rodrik, Dani. The globalization paradox. New York: W.W. Norton & Company. 2001. Print. Steger, Manfred. Globalization: a very short introduction. Great Britain: Oxford University Press. 2013. Print. Read More